Winn-Dixie Stores' Tenuous Pullback From the Brink

A few months ago, it started to look like the beleaguered Winn-Dixie Stores had a chance to step back from the brink, overcoming formidable odds against its success.

Indeed, that was the subject of a front-page profile of Winn-Dixie in SN's June 18 issue. Now there's more: As you'll see on Page 6, Winn-Dixie last week reported financial results for its fiscal year ended June 27. During that year, Winn-Dixie showed a profit of more than $300 million, against a loss of $361 million for the previous year. Sales rose to $7.2 billion, from $7.13 billion previously. Same-store sales were up 1.6%. Winn-Dixie also reported completion of 20 store remodels during its recently closed fiscal year. Those stores chalked up an aggregate sales increase of 12%. This is on the high side.

So it's all good, or is it? Maybe Winn-Dixie pulled back from a brink that was actually fading into the distance all the time. More specifically, investors want Winn-Dixie on a straight-line trajectory toward sustained profitability increases. That's why even though Winn-Dixie reported solid numbers, on the day the report was issued its stock value dropped more than 22% and shed another 2.5% the following day. Investors were spooked by the fact that the same report that announced good results also offered guidance for fiscal 2008 warning that a loss would be forthcoming then because of expenses to be incurred during the year. The exact nature of those costs wasn't clear, although the ongoing store-remodeling program was specified. Some 75 remodels are planned.

An unfortunate truth about Wall Street is that an honest appraisal of what downside potential lies ahead is sure to provoke an extravagant reaction, especially if there has been some reason to be worried all along. (Of course, in the long run it's far better to get such disclosures out of the way as soon as practicable.) In the instance of Winn-Dixie, the warning turned investors from thinking optimistically to taking a more pessimistic view of Winn-Dixie and its future.

Let's take a historical detour to find out why. Going back a decade or more, Winn-Dixie seemed transfixed by two outsized challenges it faced, namely Wal-Mart's invasion of its own low-price territory and Publix's success in draining away consumers seeking a more upscale experience. To be sure, some faint efforts were made over a long period to improve Winn-Dixie's price appeal and to beef up its service levels. Those efforts were unavailing. In February 2005, Winn-Dixie filed for Chapter 11 bankruptcy, where it remained lodged until November 2006.

During its time in bankruptcy, Peter Lynch, who joined Winn-Dixie in December 2004 as president and chief executive, shoved bitter medicine down Winn-Dixie's throat that none of his predecessors had the stomach to apply quite so liberally: He closed more than 400 underperforming stores. The once large and far-flung store empire is now down to 521 that earn their keep.

That returns us to the present time. Winn-Dixie is on a near-term upswing, yet investors continue to fret about the kind place the future will afford a mid-market operator such as Winn-Dixie. So the real challenge Winn-Dixie faces is to illustrate to consumers why it exists and what it offers — in short, its point of distinction. When that's accomplished, investors will invest.